Banking, financial services and insurance or the BFSI vertical is not a dependable space for the growth of information technology (IT) services firms this fiscal, said a report by Kotak Institutional Investors.
Several large financial sector players in the West are expecting lower spends in technology for 2019, the report said.
Most IT firms generate between 30% and 40% of their revenue from the financial sector, and the BFSI vertical is key to these technology companies achieving their growth targets for the financial year.
Kotak prepared the report after analysing the earnings call commentaries of large financial institutions of the US and Europe.
The impact on IT vendors will vary depending on exposure to challenged clients in the financial sector, potential share gains and large deal wins. Infosys is well-positioned on this count but other firms are vulnerable, Kotak said in its report.
"IT services companies face pressure from a higher squeeze on run spends, while spending in new areas remains steady. Tech spends will be volatile in the short term as firms balance short-term priorities with a long-term need for investments," the authors of the report noted.
North America contributes to 50-60% of IT firms' revenue, while Europe contributes somewhere between 18 and 28%.
"BFS firms in the US had a weak March quarter due to stress and uncertainty in the macro-environment leading to prioritisation of cost-saving initiatives over investments in the business. While the business environment in the June quarter was mixed, it was still better than the previous quarter," the report noted.
Several technology initiatives at large banks in the West suffer due to lack of sufficient talent and higher focus on compliance and risk management.
Also, the IT firms face the challenge of certain large financial institutions deciding to insource a large part of their IT operations, rather than outsource these functions to IT services firms.
In the UK, the uncertainty around Brexit remains a key concern.
Despite significant deal wins across the sectors, including the BFSI, during the first quarter of the current financial year, the growth outlook for the domestic IT sector through the rest of the year doesn’t look particularly optimistic.